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Law Makes Company Account for Past Sins

Sarbanes-Oxley Act Stresses BearingPoint

By Ellen McCarthy and Carrie Johnson

Washington Post Staff Writers
Monday, March 7, 2005; Page E01

Three months ago Roderick C. McGeary took the helm of a troubled company. A grand jury in California is investigating BearingPoint Inc.'s federal contracts. A former employee of the McLean consulting firm recently pleaded guilty to a conspiracy charge. The previous chief executive left abruptly and not on good terms with the firm. And several overseas units are bleeding cash.

But McGeary said the biggest thing that makes him toss and turn at night is a federal regulation called the Sarbanes-Oxley Act.

Sarbanes-Oxley

Congress passed the act in the summer of 2002, after financial scandals at Enron Corp. and WorldCom Inc. drove the companies into Chapter 11 bankruptcy protection and cost investors billions of dollars. The law, among other things:

In recent months, several Washington area companies have disclosed problems with their accounting controls.

BearingPoint Inc., MCLEAN

Told investors in December that it may not meet the deadline for filing its year-end financial statement because auditors had detected possible weaknesses in its financial controls.

CompuDyne Corp., Annapolis

Announced Feb. 23 that it would delay release of its financial results for 45 days to complete as much work as possible on reviews of its internal controls.

Fannie Mae, Washington

Outside auditors last year cited "strong indicators of material weaknesses" in internal controls at the mortgage giant, which may be forced to restate earnings by as much as $9 billion because regulators said it had misapplied accounting policies.

Freddie Mac, McLean

New auditors at the mortgage company found billions of dollars in accounting errors and control problems last year that the company is correcting and restating.

Mills Corp., Arlington

Disclosed Feb. 16 that it would restate earnings back to 2002 because of accounting problems that a company executive called "a byproduct of the Sarbanes-Oxley environment."

TalkAmerica Holdings Inc., Reston

Issued news release Feb. 16 saying it would delay announcing its fourth-quarter earnings and may have to restate its profit because outside auditors may have uncovered "material weaknesses" in the company's accounting controls.

The act, passed in 2002 after accounting scandals at firms such as Enron Corp. and WorldCom Inc., is intended to protect investors by mandating that executives at publicly traded companies verify the accuracy of their financial results.

Critics of the law have emphasized its expense and the burden of meeting its requirements, but the experience at BearingPoint also shows that it can help companies uncover potentially damaging weaknesses -- for example, mistakes that led to the misclassification of millions of dollars.

BearingPoint already has spent more than $20 million and assigned a staff of 75 to get its books in shape to meet Sarbanes-Oxley requirements, but even so, the firm told investors late last year that it may not be able to comply with the regulation by the deadline next month.

"This is just a massive effort. We view this as a difficult undertaking," McGeary said. Of the statement required of the chief executive by Sarbanes-Oxley, he said, "I don't take signing lightly."

Companies that cannot pass stringent reviews of their financial controls will receive a "qualified" opinion from independent auditors.

Meeting the requirements of Sarbanes-Oxley means getting deep into the details of how a company ensures that financial information it provides to investors is accurate. That means not just checking the math but also looking at where the information originates and how the company verifies its numbers.

For example, a pay increase for an employee at BearingPoint requires approval by two company managers. If one of them forgets to sign a document verifying approval, a procedure has been violated. If the company's internal testers or its auditors catch the mistake, it could qualify as a deficiency in the company's internal controls.

BearingPoint, which is a 16,557-employee company with offices in 50 states and 52 countries, has hundreds of such procedures. The document that McGeary must sign for his company to comply with Sarbanes-Oxley demands that he pledge to investors that he is confident each procedure is being followed properly.